Discussion feature

Weathering the Storm

Property is cyclical and many of us have been through previous downturns. Here, some of our real estate and corporate recovery partners discuss how the current economic climate is affecting their practice areas and impacting on their clients’ businesses.

Nick Doffman: One of the features of the current market is the mismatch between vendor and purchaser expectations. Coupled with the ‘credit crunch’ this is creating a period of inactivity and a significant drop in deal flow. Many of our clients are continuing to focus their attention on overseas property opportunities. We can certainly play our part in these transactions and frequently act as project manager where we can add value and ease the process by interfacing between our client and the appointed overseas lawyers. Our clients appreciate that our independence as a firm is an advantage in enabling us to ‘hand pick’ the very best specialist lawyers in each jurisdiction in which our clients operate rather than being bound to a particular network. We continue to be active for inward investors drawn by more favourable yields in the UK. Many of these are from resource-rich countries such as Russia and the Middle East. Some of these investors are drawn by UK trophy assets and others by the benefits of leveraging UK based finance against UK based assets.

Daniel Lipman: There is certainly no shortage of capital – we are acting for investor clients setting up opportunity funds and many who had left the UK market for more attractive yields overseas are now poised to make a return. One of the trends we are seeing is buyers finding it too risky to leave it until after exchange to enter into funding agreements, even if final credit approval has been obtained prior to exchange and even where they have long term relationships with their bankers. Increasingly clients are exchanging contracts simultaneously with bank facility agreements and we ensure that all conditions precedent to drawdown (especially those involving third parties) are satisfied or are ‘satisfiable’ at exchange. Basically, clients are doing everything they can to avoid giving the banks any ‘wriggle room’. Even then, some standard facility agreements contain ‘market change’ provisions allowing funders to withhold funds even at the eleventh hour if they perceive ‘in their absolute discretion’ that the market has changed unfavourably. This has led to some buyers requesting exchange on a ‘subject to finance’ basis, entitling them to pull out if their funders do not deliver for any reason. A properly advised seller will appreciate that this really amounts to no more than an option in the buyer’s favour. If nonetheless a seller is prepared to proceed on this basis, he must ensure the buyer’s facility agreement is in place, being mindful of any ‘market change’ provisions it contains and having made absolutely sure that all conditions precedent can be satisfied. The easy solution (other than, of course, to pay cash!) is to exchange and complete simultaneously. This is often unfeasible though particularly in cases involving forward-purchase arrangements or conditional contracts. I am frequently being asked if our bank clients are still lending. They are, but debt is now much more expensive in terms of margins and arrangement fees and loan to value ratios have really tightened too.

Matthew Lindsay: So far as our banking clients are concerned we are aware that the requirements of their credit committees are becoming increasingly stringent and they are less inclined to take a view. Whilst many banks appear to be open for business, the transactions tend primarily to be relationship driven with the banks concentrating on the refinancing of loans for existing customers rather than new business. In some cases banks are trying to exit sectors enabling other banks to come in and take over the debt. Some of our bank clients are considering taking over properties the subject of failing loans so they can hold them at cost and so avoid further write downs. We are dealing with many more enquiries from bank clients on restructuring issues and in particular how to deal with covenant breaches.

Susan Freeman: And of course we are speaking to our bank contacts and clients on a more frequent basis to see who is lending and on what terms so we are able to play a more proactive role in finding the best funding for clients.

Alan Spiers: In terms of development we are very busy on existing schemes where clients are committed to the ongoing process as part of larger scale projects that are being put in place. Echoing Daniel’s comments, anticipating funders’ requirements has become even more key than ever in this climate, and the benefit of having predicted these in tailored agreements (both development and funding) is paying dividends. Acquisition of new sites is tempered by the view, as in investment property, as to whether now is the time to buy, or wait for prices to fall further.

Ian Paul: I think the line between investment and development clients remains blurred and will probably stay that way. We continue to be active on development projects aimed at adding value for our traditional investment clients. Many of the deals we see are complex. Across the board we are able to maximise value for clients by staying ahead of the game in our use of tax planning. Interestingly and as a general theme, we are seeing an increasing number of hotel deals both in the UK and overseas.

James Garton: Yes, there is no doubt that the hotel sector is bucking the general trend. Business fundamentals for the higher and lower ends of the hotel market are still comparatively good. Only in the mid range do things seem less buoyant. We are seeing demand for space from the budget hotels remaining particularly high as they seek to protect and extend market share. A number of budget hotel developments are coming through to us with many more in the pipeline. In London, the staging of the Olympics is providing an added incentive. As a result, demand for development sites with new build opportunities and existing vacant office buildings that can be converted to hotel use remains strong. There is less transactional work at the higher end of the hotel market but we are still advising on refits and rebrandings as those high-end hoteliers seek to improve their offerings. Our hotels team, experienced in the UK and internationally, expects the position to remain fairly robust for the foreseeable future. At a time when retailers in particular are finding the going tough, investors are seeing hotels as an alternative opportunity. What we find, however, is that they often lack the necessary expertise or connections to make hotels a viable alternative in their investment portfolios. This is where we can have a role.

Susan Freeman: Transactionally, there is generally less volume and although we have some substantial deals the mismatch between seller and buyer expectations Nick mentioned means an increased likelihood of a price negotiation prior to exchange. Conversely our contentious real estate groups are extremely busy dealing with a huge volume of property dispute litigation, a clear sign of the times and our client seminars on insolvency issues are oversubscribed. Clients are requesting good commercial and strategic advice in dealing with the problems arising from increasing number of insolvencies. We included litigators in our MIPIM team this year, which has proved productive since they were in great demand.

Dan Levy: Yes we are busy. Insolvency and tenant default is on the up. In my view the key issue for clients in this climate is to move quickly and assertively; to know your rights and options and push for them, hard. Add to that an experienced and aggressive legal team and you can soon get the upper hand. Whether it is dealing with administrators, original tenants or current tenants in difficulty there is no point sitting back and waiting for events to dictate what you do, but equally no point in creating hot air for the sake of it. What is important is having the experience, rigour and commercial focus to set upon an achievable objective and then use all the tools in the litigation box to put them into effect, quickly. Never make a threat that you cannot and will not carry out. We have seen a significant increase in complex litigation across the board, including professional negligence, partnership and joint venture disputes and substantial dilapidations work where we have particular expertise.

Danny Davis: Also, in my experience, it is important to ensure that your tenants understand that, as far as their creditors are concerned, you are always at the head of the queue. That means, as Dan says, you have to move quickly and firmly, whenever you believe that a tenant is not making rent payments promptly. It is also critical that you examine all of your lease documentation, in the event that a tenant goes into insolvency, to see if there might be any other liable parties, e.g. original tenants or guarantors. On new lettings, pay extra attention to your security to avoid future problems. For instance we are now advising that guarantors should ideally be joint tenants from the outset.

This discussion will be featured on our website.
If you wish to discuss any of the comments in
this section, please contact:
nick.doffman@mishcon.com
danny.davis@mishcon.com
susan.freeman@mishcon.com
james.garton@mishcon.com
matthew.lindsay@mishcon.com
daniel.levy@mishcon.com
daniel.lipman@mishcon.com
ian.paul@mishcon.com
alan.spiers@mishcon.com

Property Matters! 06